How Bad Are Wal-Mar’s Inventory Problems?

walmart“We have to get better and remain laser-focused every day because momentum can turn against you in a second,” said Bill Simon, the executive vice president and chief executive officer for Wal-Mart’s (NYSE:WMT) United States operations, according minutes from a February 1 meeting, seen by Bloomberg at the end of last month.

Shares of the retailer are up 23.08 percent over the past 12-months and 9.59 percent this year to date, but those fundamentals belie serious problems at Wal-Mart. Earlier in February, an email from Wal-Mart’s vice president of finance and logistics, Jerry Murray, leaked to Bloomberg announced to the world that the company’s sales were a “total disaster.”

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The situation was exacerbated when Simon commented at an executive officers’ meeting, leaked once again to Bloomberg, that the company has inventory problems. “We run out quickly and the new stuff doesn’t come in,” he stated, noting that these “self-inflicted wounds” were Wal-Mart’s “biggest risk.” As the publication outlined in an article published Tuesday, Wal-Mart does not have enough workers to restock the shelves, according to interviews conducted with store workers. In the past five years, the company has added 455 stores in the United Stores, a 13 percent increase according to regulatory filings. But the company’s employee count dropped by approximately 20,000 in the same period…

This thinly spread workforce has had widespread consequences. As several interviews with Wal-Mart customers served to prove, shoppers are moving elsewhere. “If it’s not on the shelf, I can’t buy it,” former customer Margaret Hancock told the publication. “You hate to see a company self-destruct, but there are other places to go,” she added, noting that Wal-Mart’s loss has been a gain for stores like Target (NYSE:TGT) and Safeway (NYSE:SWY).

The problem is not that Wal-Mart does not have the merchandise to fill its shelves, a point that was emphasized by the company in response to Bloomberg’s article. But it is piling up in aisles and in the back of stores because of its labor issues.

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“Our in stock levels are up significantly in the last few years, so the premise of this story, which is based on the comments of a handful of people, is inaccurate and not representative of what is happening in our stores across the country,” Brooke Buchanan, a Wal-Mart spokeswoman, said in an emailed statement. “Two-thirds of Americans shop in our stores each month because they know they can find the products they are looking for at low prices.”

But despite the points the Buchanan highlighted in that statement, customer satisfaction has continued to deteriorate. Last month, the American Customer Satisfaction Index ranked Wal-Mart last among department and discount stores, and in the past six consecutive years, the company has either tied or taken the bottom spot. Even worse, in the last week, Wal-Mart traded at a 1.4 percent discount to Target on a price-to-earnings basis; comparatively, over the past two years the company has averaged a 5.9 percent premium to its rival, and it even traded as high as a 22 percent premium in January 2012.

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Zeynep Ton, a retail researcher and associate professor of operations management at the MIT Sloan School of Management, has carefully assessed the company’s customer satisfaction problems. “When times were good and people were still shopping, the lack of excellence was OK,” he told Bloomberg. “Their view has been that they have the lowest prices so customers keep coming anyway. You don’t see that so much anymore.” Shoppers are “so sick” of Wal-Mart’s inventory problems, he added.

As Ton’s assessment indicates, Wal-Mart’s inventory problems have coincided with slowing sales growth, a problem noted by Murray in his leaked emails. In the company’s earnings conference call on February, CEO Bill Simon stated that same-store sales in the United States for the 13 weeks ending on April 26 will be little changed.

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